The Powers of a Not-for-Profit

Contracts

Entities registered under the Incorporated Societies Act 1908 and the Charitable Trusts Act 1955 have statutorily implied powers (something that ma y change with reform). While some powers may necessarily be implied, it is good practice to set out detailed powers in constitutions of not-for-profit entities.

Entities incorporated under the Incorporated Societies Act (section 15) and Charitable Trusts Act (section 19) have statutory powers enter into contracts, stated differently in the two statutes. Societies under the Incorporated Societies Act have specific power to enter into compromises with creditors (sections 23A and 23B), impose penalties on members (section 3, 1922 Amendment Act), make regulations or bylaws not inconsistent with statute or the constitution (section 4, 1953 Amendment Act), and set out additional powers in rules (section 6(2)).

Companies registered under the Companies Act after 6 December 1983 were automatically given the rights, powers and privileges of a natural person (Companies Act 1955, section 15A(1)), and since 1993 the default position is that all companies have full capacity (Companies Act 1993, section 16(1)). Whether this will feature in reforming societies’ legislation has yet to be seen.

Borrowing

Section 6(1)(j), Incorporated Societies Act, requires a society’s rules to provide for any power to borrow, but the Charitable Trusts Act has no similar provision. Any power to borrow should be carefully drafted in a well-drawn constitution, whether the entity is registered under the Incorporated Societies Act or the Charitable Trusts Act, as where there is power to borrow Courts will restrict the exercise of the power to what is expressly stated. The decision in Union Bank of Australia (Ltd) v The South Canterbury Building and Investment Society (Ltd) (1894) 13 NZLR 489 (CA) might be applied to incorporated societies. There, company directors exceeded their power to borrow, but the shareholders were deemed to have ratified their actions by adopting, over a long period of years, balance sheets showing the debt.

The powers of trustees of a charity to borrow are extremely limited, unless full powers are conferred by the trust’s constitutional documents, and a trust constitution may legitimately prohibit borrowing (Caldwell v Fleming [1927] NZLR 145 (FC), and In re Clark, Horwell v Dent [1961] NZLR 635).

The Incorporated Societies Act and the Charitable Trusts Act do not provide for debentures, such as can be issued by companies under the Companies Act. Some societies issue what are loosely called “debentures” to members to raise money (as illustrated by Goodson v Hawera Lawn Tennis and Croquet Club Inc [1931] NZLR 1096), but these cannot be registered and the lenders have no security, and such borrowing must still comply with the relevant statutory and constitutional requirements.

Power to make regulations, bylaws or policies

Such issues as opening and closing hours of premises, the conduct of members, competition rules, and other matters relating to the day-to-day operations of a society can be dealt with by regulations or bylaws. A society registered under the Incorporated Societies Act is statutorily empowered to make regulations or bylaws (section 4, Incorporated Societies Amendment Act 1953), dealing with minor matters. While there is no statutory provision entitling a society or trust incorporated under the Charitable Trusts Act to do so, if the power to make regulations or bylaws is expressly provided for in its constitution a charitable entity may be able to make regulations or bylaws (in the absence of statutory authority such bylaws might be challenged as ultra vires on the authority of Martin v Otago Harbour Board (1891) 11 NZLR 376, but may be incorporated in the terms of the contract between a member and a charitable society on the authority of Lindsay v Union Steam Ship Company of New Zealand Ltd [1960] NZLR 486).

Regulations and bylaws can only be validly made as authorised under not-for-profit’s constitution (for example, by a general meeting or by the executive) and by following any procedural steps prescribed in the rules. There is nothing in the statute requiring a society to bring regulations or bylaws to the attention of members, and the effect of regulations and bylaws on members who are unaware of them is not clear.

Regulations and bylaws should not be used to limit the rights of members, and particularly not the rights of a group of members in order to benefit other members (see O’Neill v Pupuke Golf Club (Inc) [1932] NZLR 1012 in which the Bylaws Act 1910 appears not to have been cited). Under sections 12 and 17, Bylaws Act 1910, the bylaws of an incorporated society or charitable entity may be quashed for invalidity if they are ultra vires the entity, have been adopted without following the specified procedures, are repugnant to the laws of New Zealand, or are unreasonable (under section 2, for the purposes of the Bylaws Act an incorporated entity is regarded as a local authority); see, for example, McCarthy v Madden (1914) 33 NZLR 1251, and Page v Harvey [1939] NZLR 325. In Kemp v NZ Rugby Football League Inc [1989] 3 NZLR 463 a bylaw was held to be an unreasonable restraint of trade, but no reference was made to the Bylaws Act.

A power to adopt policies is also commonly incorporated in constitutions. Policies have a status below rules, bylaws, or regulations, and normally relate to procedural matters and are usually made by resolutions of general members’ meetings or of the executive. Policies adopted continue in force until the resolution making them is revoked.

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.